This technology ETF crushes the return of the S&P 500 thanks to its holdings in some of the world’s largest AI companies.
Artificial intelligence (AI) is creating tremendous value in the marketplace. Last year, enthusiasm for AI drove one company, Nvidiain a multi-trillion dollar valuation, making them the world’s most powerful data center chips for processing AI workloads.
Past technological revolutions have clearly shown that it is not easy to pick winners and losers in the long term, and this will not be the case with the AI revolution either. Most of the biggest Internet companies from the turn-of-the-century dot-com era that people bet on in the early days no longer exist. And then there are companies like Amazon who started doing one thing and then discovered that it was their side hustles that actually generated the most profit. Who would have thought that e-commerce specialist Amazon would become the world’s largest cloud computing company when it began developing its own server systems to better manage its e-commerce transactions?
Why pick one winner when one ETF can help pick them all?
There’s a fairly simple solution for investors looking to profit from AI who aren’t comfortable picking winners themselves. Exchange-traded funds (ETFs) offer a great way to buy dozens or even hundreds of AI stocks neatly packaged into a single security, eliminating the need to pick winners and losers. THE iShares ETF for the broad technology sector (IGM 0.18%) is filled with top AI stocks and has a spectacular long-term track record.
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The iShares Expanded Tech Sector ETF Just Completed a Stock Split
The iShares ETF has generated a compound annual return of 20.7% over the past five years, dwarfing the average annual gain of 15.7% over the past five years. S&P500 (INDEXSNP: ^GSPC) during the same period.
The strong returns catapulted the ETF to $512 per share in March, making it somewhat inaccessible to small investors. To address this issue, iShares conducted a 6-for-1 stock split that increased the number of shares outstanding six-fold and organically reduced its price per share by a proportionate amount. Investors can now acquire one share of the ETF for around $94.
This is good news, as investors of all experience levels now have the opportunity to take advantage of the ETF’s strong momentum thanks to tailwinds like AI. Here’s how it could turn a $200,000 investment into $1 million in the long run. (But don’t worry; investors with any of them the starting balance can yield a five-fold return if this scenario comes true.)
A diversified portfolio of AI and technology stocks
The iShares ETF was established in 2001 and has therefore invested across several technology booms driven by things like e-commerce, smartphones, enterprise software, cloud computing and now AI.
He has amassed a vast portfolio of 278 different stocks, although he is heavily weighted toward his top five holdings, which represent 42.9% of the fund’s overall value:
|
Top iShares ETF Holdings for the Broader Technology Sector |
ETF Portfolio Weighting |
|---|---|
|
1.Nvidia |
11.03% |
|
2. Apple |
10.00% |
|
3. Microsoft |
8.51% |
|
4. Metaplatforms |
7.76% |
|
5. Alphabetical class A |
5.58% |
Data source: iShares. Portfolio weightings are accurate as of June 13, 2024 and are subject to change.
Nvidia’s data center revenue jumped 427% to $22.6 billion in its most recent quarter, and the company still can’t meet demand for its graphics processing chips (GPUs). designed for AI workloads. Nvidia was valued at $360 billion at the start of 2023; it’s now worth $3.2 trillion, so its position at the top of this ETF should come as no surprise.
Apple has just revealed its own suite of AI features, which will be powered by a combination of its own technology and OpenAI’s ChatGPT. There are more than 2.2 billion active Apple devices worldwide, led by the flagship iPhone, so this company could soon become the largest marketer of AI to consumers.
Microsoft, for its part, helps businesses access the latest AI models through its Azure cloud platform, which they can use to develop their own applications. Additionally, the company agreed to invest an additional $10 billion in OpenAI in January 2023 and is integrating the latest GPT-4 models into popular software applications such as Word, PowerPoint, and Outlook.
Microsoft, Apple and Nvidia are currently the only companies worth at least $3 trillion.
Outside of its top 5 holdings, the iShares ETF also has a stake in companies using AI to improve their existing businesses. Netflix uses AI to power the recommendation engine of its streaming platform, and Selling power uses AI to deliver more value to customers of its relationship management software.
Finally, investors will also find data center and AI infrastructure stocks like Advanced microsystems And Oracle in this ETF.
Turn $200,000 into $1 million
The iShares ETF has generated a compound annual return of 10.6% since 2001, but the proliferation of technologies such as software, cloud computing and AI has accelerated that annual return to 19.7% over the past 10 years.
The table below shows how long it would take the iShares ETF to turn a $200,000 investment into $1 million under three scenarios:
- Scenario 1: The ETF returns to its long-term compound annual return of 10.6%.
- Scenario 2: The ETF offers an average compound annual return of 15.2% (midpoint of scenarios 1 and 3).
- Scenario 3: The ETF continues to generate a compound annual return of 19.7%.
|
Starting balance |
Average annual compound return |
It’s time to reach $1 million |
|---|---|---|
|
$200,000 |
10.6% |
16 years old |
|
$200,000 |
15.2% |
12 years |
|
$200,000 |
19.7% |
9 years |
Calculations by author.
As you can see, the ETF can increase its return fivefold over the next 16 years, even if its compound annual gain drops to 10.6%. But the AI industry is still in its infancy, and Wall Street estimates suggest it could add between $7 trillion and $200 trillion to the global economy over the coming decade. Scenarios 2 or 3 could become reality if this value is unlocked.
That said, this ETF is likely to underperform if AI fails to live up to the hype. Stocks like Meta Platforms and Netflix could help cushion losses because they have strong existing businesses outside of AI, but other stocks like Nvidia would almost certainly weigh them down.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle and Salesforce. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.